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Remember When the Home Video Market Never Materialized?

By Ellen Stutzman, Director of Research & Public Policy

In 1976, Universal City Studios and Walt Disney Productions sued Sony, the maker of Betamax VCRs, alleging that consumers used Sony’s product to record copyrighted works, thus infringing on Universal and Disney’s copyright. They alleged that Sony was liable for the copyright infringement committed by its users and sought damages as well as an injunction to stop the manufacture and marketing of Betamax VCRs. The studios argued that consumer recording of programs would harm the market for reruns, theatrical films and rentals. The Supreme Court ruled against Universal and Disney, finding that VCR’s did not impair the value of copyright, had many other uses and an injunction would deprive the public of the ability to use Betamax VCRs for these non-infringing uses.

As we are all aware, this decision spelled the end of the entertainment industry as all consumers used this new technology to become pirates.

Not quite. Rather, format wars crowned VHS the victor over Betamax and created a new platform for the reuse of feature films. In reality this technology facilitated the growth of an important ancillary revenue stream for the industry, one so important WGAW members even struck for their fair share. The growth of this market led to the introduction of the DVD player, one of the most quickly adopted technologies in history. DVDs fueled industry growth as library product and television shows were monetized alongside new feature films. The result was a U.S. home video market that grew to a peak of $21.8 billion in revenues. If the studios had prevailed, they might never have discovered the potential that existed for the home video market.

This historical review is relevant to the current debate over online piracy and the future of the Internet. Like VCRs, the Internet has arisen as the next distribution platform for content. Also like VCRs, the Internet and its sites and services can facilitate copyright infringement. But the Internet also offers many other things that writers, our society, and consumers place a great value on and want to protect. This is primarily what the fight over the Protect Intellectual Property Act (PROTECT-IP or PIPA) and the Stop Online Piracy Act (SOPA) is about.

The premise of these bills – to deprive commercial pirates of the financial rewards of pirating - is something we most certainly support. How to achieve this while protecting an open Internet that enables free expression, competition and innovation is the heart of the matter. In May 2011 the WGAW issued its support of PROTECT-IP, the Senate Bill, because it took a more focused approach to addressing piracy. While no legislation is perfect and PROTECT-IP contained provisions the WGAW would like to have improved upon, it attempted to balance diminishing copyright infringement with an open Internet, free speech and due process.

When the House introduced its version, SOPA, it went too far. The bill included broad and vague definitions of what constituted an infringing site, such that video aggregation sites that allow content creators and users to distribute their works without gatekeeper approval could be targeted even if they made efforts to remove infringing content when notified. The initial version of the bill allowed copyright owners, without a court order, to require advertising networks and payment processors to cease business relations with sites. While changes were made to this provision, the bill continued to include language that would have incentivized payment processors and ad networks to cut off relations with sites without a court order or proper due process to determine that a site was in fact dedicated to infringing activity. The private right of action given to copyright owners was cause for concern because, as seen in the Betamax case, the media companies are often aggressive in their attempt to control technology.

The way in which SOPA was written raised significant concerns about its impact on free speech, due process and a competitive market. The Internet represents a genuine opportunity to reintroduce competition to the entertainment industry and allow WGAW members to produce and distribute works they own, a reality all but eliminated with the repeal of the fin-syn rules in the early 90’s. To realize this opportunity, Internet delivery of video content must not become consolidated in the hands of a few companies.

As Columbia Law Professor Tim Wu makes all too clear in his book, "The Master Switch," incumbent media companies have historically engaged in such legal and legislative overreaching in order to diminish competition from new media technologies and maintain market control. As Professor Wu points out, this pattern has existed since the emergence of the telephone, when entrenched telegraph companies attempted to destroy the revolutionary invention, and continued through the radio companies' attempt to quash the development of television, and broadcast television's attempt to thwart the growth of cable.

SOPA’s approach to piracy would have made it very unattractive for new sites to develop, thus limiting competition. As such, the WGAW was opposed to this bill. In meetings and written communication, WGAW elected officials and staff communicated this opposition to members of Congress. We outlined our specific concerns in an effort to reduce the potentially harmful effects of the proposed legislation.

Proponents of SOPA contend that the Internet represents a much greater threat to the industry because it makes pirating easier. They use this logic to argue for legislation that would impact the Internet far beyond piracy, not unlike the Betamax lawsuit. In the case of the Internet, the trials of the music industry certainly suggested that this new platform could represent a larger threat to copyrighted works. However, many of the business developments of recent years suggest that consumers’ habits have not fundamentally changed. Rather, if offered content in attractive ways, consumers will continue to pay for it. Netflix currently has 20 million streaming customers and reported that users streamed 4 billion hours of video in the fourth quarter of 2011. In fact, Netflix now represents 30% of peak downstream Internet traffic in the U.S. Netflix is not the only Internet video business that is growing. In 2011, Amazon announced licensing deals with CBS and News Corp as it attempts to build its video streaming service. Analysts estimate these short-term deals will generate $100 million in revenues for each company. Hulu has stated that it earned $420 million in revenue in 2011 and has 1.5 million Hulu Plus subscribers. Hulu’s CEO also stated his intention to spend $500 million investing in content in 2012. Subscriber growth, legal traffic growth and investment in content for online distribution highlight the ability of the Internet to become yet another successful platform for content. Even the Recording Industry Association says, “The single most effective anti-piracy strategy is to help build a thriving legal marketplace.”

While the backlash against PROTECT-IP and SOPA has slowed the political process, anti-piracy legislation remains an industry priority. As the debate moves forward, the WGAW will continue to support approaches that diminish infringement while protecting free speech, an open Internet and due process. For more information on the WGAW’s work in Washington, click here. Current Active WGAW members can support this work directly by making contributions to the Guild’s Political Action Committee (PAC) here.